One and a Half Cheers for M&A Revival

Corporate activity, the thrust and parry of merger and acquisition, is staple fare for equity markets in the good times.

The long courtship dances, the suitors spurned and all the juicy rumors that fly before a big deal is consummated used to be joyous reminders to stock investors that they were still alive.

And for a while there they must have wondered.

M&A famously fell of the cliff along with stock markets as the world lurched into crisis-spawned recession. It’s easy to see why. Forget getting expansion past your shareholders, even if you could get any credit for a deal out of the financial system’s constipated innards. Survival was the name of the game.

Corporate lawyers faced ruin as all that lucrative matchmaking business dried up. I know, brings a tear to the eye doesn’t it? In the first six months of 2008, U.K. deals were 90% down on the same period the year before, and it was the same picture almost everywhere else. For the year as a whole, global merger volume reportedly dropped by almost a third in 2008, after years of reliable expansion.

So far so good, but the plain fact is that many corporations are sitting on huge piles of cash. More than $2 trillion languishes on the balance sheets of U.S. and European companies, according to the Financial News website.

They could always just give it back, of course, if they can’t think of a use for it. And a lot of shareholders might like them to do just that, in the form of an increased dividend, especially in view of the notoriously poor long-term track record of the mega-merger.

For much of 2010 corporate boards had something of a get-out here. Thanks to extraordinarily low interest rates, dividend yields were already high in comparison to those on offer elsewhere even if they weren’t objectively very enticing. But to keep dividends down on that basis looks like an increasingly Scrooge-like tactic in the face of such a monstrous heap of money.

All other things being equal, the return of M&A ought to be what investors would have it be, a return to less interesting times. However, through the looking glass of financial crisis, things are not often what they seem. It could be that companies decide they have seen all the profit growth they can generate from years of trimming back and making do. The resilience of corporate profits through recession has continuously surprised the markets’ bears and also enticed buyers in. But much of this resilience came from precisely this sort of trimming.

Now, if the prognosis remains for relatively low growth, the next plan for getting ahead of it could simply be to buy someone else’s growth instead. It will be interesting to see how many shareholders go for this, especially as the business cycle turns.

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